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Turn on your Guaranteed (Joint) Lifetime Income Benefit ... now ... says Milevsky

| June 05, 2016
Retirement Income

Referencing an earlier post, there are a number of ways to receive Guaranteed (Joint) Lifetime Income.  The linked post shows 7 ways. (Sources of Guaranteed Lifetime Income.)   As I rethink this post, I left out the most obvious … Social Security.

Benefits of Waiting vs. Starting Lifetime Income Now
Many financial folks, financial writers, as well as math-oriented members of the general public might be aware that Social Security provides “pretty darn good” financial incentives for waiting.  Roughly an 8% increase in lifetime income for each year you wait … until age 70.  (Then, no more.)  Without getting too much into the very deep math weeds for people who don’t want to hear about “the area under the curve” or  the “crossover point” or “break-even analysis,” I’ll just say the following.  The longer you live, the greater the benefit of waiting.

This is oversimplified.  If you start taking Social Security at age 66 and then died before your 70th birthday, there was an obvious benefit to taking the income now.  You enjoyed spending it.  Or, you didn’t spend a penny but your loved ones (heirs) inherited those payments.  Had you waited until age 70 … nothing.  No extra enjoyment from the extra income.  No inheritance for heirs.

Such is also the downside of a pension regarding a possible inheritance to children / anyone else but a spouse.  Typically, no inheritance at all.

Deferred Annuity with Income Rider
This is a very different animal.  Sometimes clients and prospects say the best things.  Typically after I get over being offended, I think … “they’ve got a point.” Using a totally hypothetical income payout rate of 5% and an Income Base starting point of $100,000 … the annuity carrier pays you $5,000 annually … guaranteed (joint) lifetime.  Great, said my client.    

They’re paying me back my own money for the first 20 years.”

I thought about it.  True, I said.  If you had the hypothetical $100,000 CD (ignoring “zero” interest) at the end of the years, you have $0.  But with your annuity, if you started the income at 70 and you (or your spouse) are now 90, the income continues as long as either one of you lives.  That’s why these riders cost.  Some of these riders have some even better benefits, especially income increases locked in for life during the income phase.

So Moshe Milevsky, international annuity expert, thought maybe he should add dollars to his existing contract.  You can’t buy benefits as rich as what he owns, but he could add money.  He couldn’t calculate on his own.  He got his computer / math / annuity professionals to help him.  Here's the link.

No … emphatically no … says Dr. Moshe Milevsky … one of the foremost annuity experts around.  He and his “quant” team ran the numbers … exhaustively, I think.  He was actually trying to answer a different but related question.  Many early adopters of these benefits later found that they could not buy another contract because the carriers had changed newer policies.  However, many of the older policies did allow the owner to put more dollars into them … typically before they had started the income phase.

So Milevsky and team were running the numbers to see if adding more money to these contracts made economic sense.

They found the opposite.  Purely for example, if your Guaranteed (joint) Lifetime Benefit pays out 5% of principal (“income base,) then you are “getting your own money back” for the first 20 years.   At the beginning of Year 21 (in this example,) you are now “playing with the house’s money.”  So if you live 15 more years, you “win!”  Typically, again, as long as you didn’t “raid” your contract, this benefit will pay you as long as you live.  That’s why people do it!

Milevsky’s group finds that you are better off with these Guaranteed (joint) Lifetime Income Benefits if you start the income … now … (if eligible) … or … sooner rather than later.  He did the math and you can read the entire article.  My simplistic explanation is that the sooner you get your own money back, the sooner you are “playing with the house’s money” and benefiting from the (hopefully) many more years that you might live!

The conventional wisdom that we have gleaned from Social Security does not apply.  Yes, in many cases your Guaranteed Lifetime Income monthly amount might well go up by waiting … for a variety of reasons.  But that possible increase is not enough to outweigh the big advantage of playing with the house’s money sooner, rather than later.

This is an oversimplified example.  Call me if you need help doing the math.  Check with your own provider about specifics.  Or, I might be able to consult if you wish.  These things are nearly always more complex than we would like them to be … but many times more valuable than we might realize!

Thoughtful analytical people -- especially those who are both analytical and mathematical -- sometimes ask interesting questions -- and also sometimes get an unexpected answer. Here is one of those t

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